Mixed, Pre-BoJ Adjustments Dominate, Long End Firms Again

JGB futures were more contained than in recent sessions on Tuesday, consolidating the overnight session uptick after a pull back from best levels, heading into the bell +15, with pre-BoJ position adjustments front and centre.

• Yields are mixed across the curve, running 1bp cheaper to 4bp richer, with a flattening element apparent as the long end outperforms for a second consecutive session (albeit after last week’s dramatics).
• Swap rates are lower across the curve with 7s leading that move.
• Note that there are signs of JGB futures basis trades being deployed given the well-documented market dislocations.
• Unlike JPY FX implied vol., JGB implied vol. (as observed via the S&P-JPX JGB VIX metric), although elevated, has not breached its post-COVID peak in the run up to the BoJ’s monetary policy meeting,.
• The latest liquidity enhancement auction for off-the-run 5- to 15.5-Year JGBs was smoothly digested, likely aided by pre-BoJ short cover.
• Comments from Japanese Finance Minister Suzuki failed to move the needle as he went over old ground re: debt financing costs, purposefully steering clear of meaningful comments re: the BoJ.
• The aforementioned BoJ decision provides the major macro risk event on Wednesday (see our full preview of that event here). Elsewhere, final industrial production readings and core machine orders data round out Wednesday’s local docket.